1. P co owns 60% of the S Co for 720,000 on 1/11/16. S co had 400,000 of common
ID: 2593657 • Letter: 1
Question
1. P co owns 60% of the S Co for 720,000 on 1/11/16. S co had 400,000 of common stock and 200,000 of retained earnings on that date. 1. P co owns 60% of the S Co for 720,000 on 1/11/16. S co had 400,000 of common stock and 200,000 of retained earnings on that date. 1. P co owns 60% of the S Co for 720,000 on 1/11/16. S co had 400,000 of common stock and 200,000 of retained earnings on that date.The following values wee determined for the S Co on the date of purchase Inventory book value 80,000 and Fair value 100,000 Land book value 700,000 and fair value 900,000 Equipment book value 500,000 and fair value 550,000
Prepare the 1-11-16 work paper entries to eliminate the investment account and to allocate the difference between the cost and book value
2. Referring to problem #1, of the equipment has a remaining life of four years, prepare the workpaper entry to allocate the difference between cost and book value for 12-31-16 and 12-31-17. Be sure to label the years
The following values were determined for the S. Co. on the date or p FAIR VALUE Inventory Land Equipment BOOK VALUE $80,000 $700, $500,000 $100,000 $900,000 $550,000
Explanation / Answer
1) In this question the assets are first marked up to its book values (Work entry no 1).
Asset Book Value Fair Value Difference
Inventory 80,000 100,000 20,000 (100,000-80,000)
Land 700,000 900,000 200,000
Equipment 500,000 550,000 50,000
Total 12,80,000 15,50,000 270,000
The total value of investment at cost is 720,000 while the current book value as per S Co. books is 12,80,000. Thus it will be marked up by 660,000. Work entry for such mark up would be-
Inventories Debit 80,000
Land Debit 700,000
Equipment Debit 500,000
Investments Credit 720,000
Retained Earnings Credit 560,000
2) The equipment is to depreciated at revised book values over the remaining life of 4 years. Thus depreciation would be revised.
2016-
Before the revision- 500,000/4 =1,25,000
After the revision- 550,000/4=1,37,500
Work Entry for balance of depreciation would be recognised-
Depreciation expense Debit 12500
Accumulated depreciation on Equipment Credit 12500
2017- 55000/4= 137500
Work entry for depreciation would be
Depreciation expense Debit 137500
Accumulated depreciation on Equipment Credit 137500
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